2018 Registration document and annual fi nancial report - BNP PARIBAS 437

5RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Insurance risks

Market risk falls into four categories:

■ Interest rate risk :

Underwritten life insurance policies are measured based on either a contractual fi xed rate or a variable rate, with or without a minimum guaranteed return. All of these policies give rise to an interest rate and asset value risk, corresponding to the risk that the return on admissible assets (i.e. assets acquired by investing premiums) is less than the contractual return payable to policyholders. In France, the average rate guaranteed by Cardif Assurance Vie in 2018 remained stable, below 0.1%.

Besides, 83% of BNP Paribas Cardif group s mathematical reserves have guaranteed minimum return commitments with a term of less than or equal to two years.

In France, to cover for future potential fi nancial losses, estimated over the lifetime of the policies, a provision for future adverse deviation (provision pour aléas fi nanciers) is booked when total amount of technical interest plus the guaranteed return payable to policyholders through technical reserves is not covered by 80% of the return on the admissible assets. No provision for future adverse deviation was booked at 31 December 2018 , 2017 , or 2016 , as the returns guaranteed by the insurance subsidiaries were low and the guarantees were for short periods, resulting in only limited exposure.

■ Liquidity risk:

L iquidity risk is managed centrally by the Asset/Liability Management unit. Asset-liability matching reviews are performed regularly to measure and manage the fi nancial risks incurred. They are based on medium and/or long-term profi t and loss account and balance sheet projections prepared using a range of economic scenarios. The results of these reviews are analysed in order to determine any adjustments to assets (through strategic allocation, diversifi cation, use of derivatives,

etc.) required to reduce the risks arising from changes in interest rates and asset values.

■ Spread risk:

L imits by issuer and rating type (investment grade, non investment grade) are monitored regularly. Issuer credit quality is also reviewed frequently. There is little exposure to sovereign risk in the peripheral euro zone countries.

■ Change in the value of assets:

The exposure to the risk of a fall in asset values (interest rate, spread, equities, real estate) is mitigated by the mechanism of the deferred participating benefi t, attached to the insurance contracts containing a participation feature.

GROUP BNP PARIBAS CARDIF INVESTMENTS The BNP Paribas Cardif Group manages EUR 161.5 billion at net book value i.e. EUR 162.9 billion at market value, through its subsidiaries in France, mainly Cardif Assurance Vie, representing EUR 128.1 billion , through its subsidiaries in Italy, mainly Cardif Vita, representing EUR 20.8 billion and its subsidiary in Luxembourg, Cardif Lux Vie (EUR 8.4 billion). Cardif Lux Vie is now fully consolidated within the BNP Paribas Cardif scope at 31 December 2018.

BNP Paribas Cardif Group investments break down as follows:

➤ TABLE 96 : BREAKDOWN OF BNP PARIBAS CARDIF GROUP INVESTMENTS (EXCLUDING INVESTMENTS IN UNIT-LINKED CONTRACTS) [Audited]

In millions of euros

31 December 2018 31 December 2017

Net book value Market value Net book value Market value

Equities and variable-income securities 34,869 34,869 30,153 30,153

Real estate 4,838 5,842 6,947 7,943

of which buildings 3,138 4,142 3,106 4,102

of which shares in real estate companies 1,700 1,700 3,841 3,841

Government bonds and similar 53,960 54,368 52,890 53,515

Other bonds 65,707 65,723 61,275 61,279

Derivative instruments and other 2,140 2,140 1,990 1,990

TOTAL 161,513 162,942 153,254 154,879